Interest Earned on Premium Deposit Rider Not Subject to Final Tax on Interest and/or Yield on Deposit Substitute Instruments

June 24, 1986 BIR RULING NO. 091-86 21 000-00 091-86 Gentlemen : This refers to your letter dated April 26, 1985 requesting confirmation of your opinion to the effect that the interest earned by the policyholders on premium deposits made with the Pioneer Life Assurance Corporation (Pioneer) is subject to the 15% (now 17%) final withholding tax. It is represented that Pioneer maintains a Premium Deposit Fund which operates as follows: Policy-holders make deposit of at least P500 to the Fund for payment of future premiums on their policy; that in the meantime that the deposit is not applied in payment of premium, the same earns interest at such rates as Pioneer may declare each year but not less than the lowest interest rate prevailing on savings account in banks; that interest earned shall be credited to the Fund on each policy anniversary; that the balance of the deposit inclusive of interest earned, may be withdrawn anytime at the option of the policyholders; that each policyholder making a premium deposit shall be issued a Premium Deposit Rider; and that Pioneer takes up in its books such deposit as liability to policy-holders. In reply thereto, I have the honor to inform you that under the foregoing facts, that premium deposit is not a means of raising funds by banks and non-bank financial intermediaries; hence, the same is not considered a "deposit substitute" as defined in Section 20(y) of the Tax Code as amended by P.D. No. 1959 and implemented by Revenue Regulations No. 17-84. Accordingly, interest earned on such Premium Deposit Rider is not subject to the 17% final tax on interest and/or yield on deposit substitute instruments pursuant to Section 21(d) in relation to Section 51(d)(1) of the Tax Code as amended by P.D. No. 1994. However, the policy-holder has to declare the aforesaid income as part of his gross income and pay the income tax due thereon under Section 21(b) of the Tax Code. cdta Very truly yours, (SGD.) BIENVENIDO A. TAN, JR. Commissioner